The Low Carbon Economy Index 2016

The Paris Agreement: A turning point?

Tracking the progress G20 countries have made to decarbonise their economies since 2000. Join the conversation on Twitter: #LCEI

A turning point?

In Paris last year, governments agreed to limit global warming to well below two degrees. Did this signal a turning point? Are countries matching the decarbonisation pledges they made at the climate summit?

The results are positive. In 2015 the world economy decarbonised at a record 2.8%. But this still falls far short of the rapid reductions needed to achieve the two degrees goal.

As a result of this decarbonisation gap, companies face both climate impacts risks and low carbon transition risks – their investors are increasingly demanding to know the implications and calling for better disclosure. The G20 FSB Task force on Climate-related Financial Disclosure is expected to issue guidelines on how they should do this. 


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Pathway to two degress

This year marks a step change in the decarbonisation of the global economy. For the last 15 years the global decarbonisation rate has averaged only 1.3% a year. In the lead up to the Paris Agreement in December 2015 carbon intensity fell by a record-breaking 2.8% (up from 2.7% in 2014). Some major emerging economies, including China, showed sharp reductions in carbon intensity last year. In addition several countries saw sharp falls in coal consumption. These may be the first signs of the uncoupling of emissions from economic growth.

Global emissions were flat in 2015 while GDP grew by a respectable 3.1%. Coal consumption fell by 1.8%, with a switch to lower carbon gas (+1.7%) as well as oil (+1.9%). Wind and solar energy output grew at 17.4% and 32.6% last year, but are still tiny fractions of the whole energy system.

Governments have proposed a range of emissions targets with different baselines and target years. To gauge performance, PwC’s Low Carbon Economy Index calculates the implied carbon intensity pathways and assesses their ambition on a comparable basis.

Overall, the INDC pledges aim for a global average decarbonisation rate of approximately 3% per year – more than double the business as usual rate of 1.3% (2000-14). This suggests a step change  in government policies to reduce emissions and support clean infrastructure investment. But this INDC pathway is more closely aligned with the IPCC’s three degrees scenario. 

Despite the relatively rapid decarbonisation in 2015, countries still fall short of what’s needed. Based on expected GDP growth of approximately 3% each year and the remaining two degree carbon budget, on average, countries will need to reduce their carbon intensity by 6.5% every year from now to 2100.

Countries are expected to address this ambition gap during the global stocktake and INDC review process over the next few years. Governments will need to engage with business to clearly make the link between their ambitious emissions targets, their policies – both sector specific and economy-wide – and investment in low carbon infrastructure and products. 


Progress in 2015 vs. INDC targets

Our Low Carbon Economy Index shows how fast the G20 countries decarbonised their economies last year, relative to their INDC targets. The good news this year is that three of the world’s six largest economies (US, China and UK) are at the top of the league table.

Explore this years' Index results using the interactive tool.

  • Select a benchmarking option to compare country performance:


Has coal consumption peaked in China?

China’s position at the top of the Index is the result of falling coal use and the changing nature of its economic development, with rapid growth in services. China consumes half the global coal output, so changes that affect consumption in China have global significance for the coal market and emissions. In 2015, coal consumption in China fell by 1.5% (see footnote) or 29 Mtoe (million tonnes of oil equivalent), which compares with total UK consumption of 23Mtoe last year. This fall has been the most significant factor in levelling China’s emissions and is partly the result of policies to improve air quality and power plant efficiency. And although it is a small part of China’s economy, solar power grew by 70% in 2015.

As China looks to rebalance its economy, the service sectors have experienced significant growth, with average annual services exports growth of 14.3% since 2010. Financial services dominated this growth, as the financial intermediation industry’s share of Chinese GDP grew by 1.5 times over 5 years (from 6.2% in 2010 to 9.2% in H1 2016).

Has coal consumption peaked in China?

Footnote: China’s own official figures suggest that coal consumption fell by 3.7% from 2014 to 2015.

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The UK maintains position as climate leader

For the second year running, UK’s consumption of coal has fallen by over 20% and has maintained its position as a leader in our Index.

This is largely the result of the EU’s Large Combustion Plant directive and a UK policy to close all coal-fired power plants by 2025. Coal now makes up around 12.2% of the UK energy mix. This trend is accompanied by a 31% increase in renewables generation, which has now reached 9.1% of the energy mix. Only two years ago coal’s share of the energy mix was more than three times that of renewables.

While changes in coal and renewables have played significant roles in the reductions in carbon intensity, changes in the UK economy have also been important. The service sector has been the primary driver of the UK economic recovery since the recession in 2008. Services now accounts for 80% of total UK jobs and is expected to continue growing. Manufacturing on the other hand has suffered, with outputs falling in 2015 after being relatively flat since early 2011.

The decarbonisation of the UK’s economy looks set to continue. Recent government announcements include the adoption of the fifth carbon budget, the approval of the Hinkley C nuclear power project and confirmation of the government’s intent to ratify the Paris Agreement. But there are questions about the status of the EU Emissions Trading System and whether climate action will feature in the Government’s ‘Brexit’ negotiations with the EU.

The UK maintains position as climate leader
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Responding to climate risks is a strategic business priority

Our Low Carbon Economy Index shows the rapid transition that is needed to get to the INDC targets and ultimately to 2 degrees. This transition presents high probability, high impact risks to the financial performance of companies as well as to the returns expected by their investors and lenders.

Such companies, including financial institutions such as banks, insurers and asset managers/owners, are increasingly expected to identify, understand, manage and report on a range of climate risks and opportunities that will drive the transition to a low-carbon, climate resilient economy. This should allow their stakeholders to better understand and price in these risks and the issue is now firmly on the agenda of financial regulators.

In his speech at Lloyds of London last year, Mark Carney, Governor of the Bank of England and Chair of the Financial Stability Board (FSB), identified climate change as one of the most material threats to financial stability. As a result the FSB set up a Taskforce on Climate-related Financial Disclosure (TCFD) at the climate summit in Paris. This Taskforce will provide guidelines for financial disclosure on climate risks, including by financial institutions by the end of 2016. The Task Force is focused on the disclosure of financial impacts arising from climate change, and looks to move reporting beyond carbon footprinting alone. Currently few companies or financial institutions are comprehensively able to disclose the financial impacts of climate change to their business.

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